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Disaster Tax Help from the IRS

If you suffer through a natural disaster, you may be able to find some financial relief. If the area in which you’re located is declared a major disaster area, then you can claim losses on your tax return.

irs disaster relief

If your state is prone to disasters, you may want to make electronic copies of your tax and financial documents to keep them safe. Ideally, you’ll store the electronic copies in a secure place, away from the area likely to be affected. You can also take photographs or make videos of your assets so that you can document the damage for tax purposes.

Bankrate explains the steps you need to take to claim losses:

“Paperwork you’ll have to file

“If you meet the loss limits, the process to claim them is the same regardless of which tax year you choose to file the claim.

“The first step is gathering the proper forms. To claim disaster losses, you must file the long Form 1040 individual tax return plus Form 4684 to figure and report your casualty loss and Schedule A to itemize your loss deduction. If you need to file an amended return to claim losses, use Form 1040X instead.

“Then determine how the damage has hurt your property’s fair market value. This is a two-part valuation: what your property was worth immediately before the catastrophe and what it’s worth after.

“The pre-disaster value is your ‘adjusted basis’. For homes, this usually is the cost of the property plus certain adjustments such as improvements that add to the structure’s value; for vehicles or other personal property, it may be depreciation that reduces its value. Get an appraisal for the post-disaster value of the property and compare it with your adjusted basis. The difference between the two amounts is your loss from the casualty.

“Once the loss is determined, use Form 4684 to figure the deductible amount of your casualty loss. You must reduce the initial loss claim amount by any insurance or other reimbursement you have received. If you have insurance on your property, you must submit a claim to use the damage to it as a casualty loss. In other words, you can’t decide you don’t want to pay the deductible your insurance would require and then use the total, unreimbursed loss amount as your casualty claim. And all insurance payments must be used to repair or replace your property, or any excess not used for these purposes could be a taxable gain to you.

“Then this is where the $100 mentioned earlier comes into play. You further reduce your loss by that amount before finally reducing the total yet again by 10 percent of your adjusted gross income to get to your final casualty loss deduction.

“Figuring the tax costs of damage

“The following work sheet shows the computations that a hypothetical Tom Taxpayer, who suffered through a federally declared flood disaster, had to make. The water substantially damaged Tom’s home, the property inside and his car. Insurance covered only a part of the losses.

“Tom’s adjusted gross income is $60,000, and that’s what he uses to figure his casualty deduction. Tom was off work — and without pay — for the week that his employer was closed during a flood in May 2015. Unfortunately, Tom can’t claim the lost income. The IRS provides no deduction for missed wages, even in the event of federal disasters.

Form 4684 work sheet

House and land Personal property Auto Total
1. Original property cost $100,000 $25,000 $18,000
2. Fair market value (basis) before disaster $150,000 $15,000 $12,000
3. Fair market value (appraisal) after disaster $75,000 $5,000 $4,000
4. Decrease in value (line 2 minus line 3) $75,000 $10,000 $8,000
5. Smaller of line 1 or line 4 $75,000 $10,000 $8,000
6. Insurance reimbursement $50,000 $5,000 $4,000
7. Loss after reimbursement (line 5 minus line 6) $25,000 $5,000 $4,000
8. Total loss (total of line 7 entries) $34,000
9. Subtract $100 $100
10. Loss after $100 rule $33,900
11. Subtract 10% of adjusted gross income $6,000
12. Deductible disaster loss amount $27,900

 

“Now it’s time to figure out the ‘real money’ value of Tom’s deduction. Remember, Tom’s (and your) deduction doesn’t directly translate to the amount of whatever refund he (or you) will receive. You must refigure your taxes using this new deduction (entered on Schedule A and Form 1040X) to determine just how much you’ll get back.

“Tom, a single filer, decided to amend his 2014 tax return since he took only the standard deduction of $6,200 when he filed earlier this year. But now his much larger, disaster-related itemized deduction amount, depending upon how much he paid in taxes, will likely produce a nice refund.

“And Tom didn’t have to wait to file the amended return. He submitted it as quickly as he could after the major disaster was declared instead of waiting until the 2016 filing season to claim the losses on his 2015 return. As soon as he completed the revised tax paperwork and got it to the IRS, the disaster-related refund was on its way to Tom so he could put the tax cash to work repairing his home.

“Tom, of course, carefully considered his filing options and ran the tax numbers for 2014 and projections for 2015, when his property was actually damaged by the rising waters. If he had not been in such dire need of post-flood cash, he could have waited. Depending on your circumstances, you might find it more worthwhile from a tax standpoint to claim disaster losses in the year they occurred.”